Building out a digital signage network takes a lot of capital -- there's no doubt about that. And for many companies, the challenge of raising enough money to get a network started is matched in difficulty only by the subsequent tasks of raising follow-on money for expansion, and making a successful exit via merger or acquisition. (I'd normally add "or IPO," but I'm hard pressed to find an example of a publicly-traded digital signage company that I'd be willing to call successful.) That's where Kevin Covert comes in. You may not know him by name, but Kevin and his firm were the force behind Reactrix's $45 million capital raise, as well as SignStorey's $71 million sale to CBS. Since he's going to be speaking at Strategy Institute's Digital Signage Investor Conference in October, I gave him a call to see what he thinks about the market, the interesting deals he sees on the horizon, and perhaps most importantly, what it takes to be successful with mergers and acquisitions in the digital signage space.

Does raising more money upfront = success?

I've written about the do's and don'ts of digital signage a number of times in the past. And as any regular reader will tell you, a surefire recipe for digital signage failure is expecting to be ad-revenue supported without any prior experience selling ads. That's by far the best way to crash and burn (or, more typically, sputter and die) in our market. But a close second is not leaving enough working capital in the bank to cover the longer-than-expected road to break-even/next milestone/profitability. And Kevin echoed that same sentiment. But is raising a lot of cash early on a guarantee of future success? Not always, and one of Kevin's own deals -- Reactrix -- is a good illustration of that. The firm raised $45 million very early on in their life, with little more than a tech demo and a dream. Their buildout was fast and furious after that. Unfortunately, so was their burnout.

Admittedly, Reactrix worked themselves into a tight spot. Not only were they faced with the massive expense of building out their own network of interactive displays, but they were also designing their own technology in-house. And if that wasn't enough, their medium of gesture-aware projections on floors, walls and ceilings was unlike anything that advertisers had ever worked with before, so they also had the extremely tough (and ultimately fatal) challenge of convincing advertisers that the totally custom content developed for their brand-new medium was going to pay off in a big way.

Is anyone actually buying and selling companies these days?

Pop quiz: if there's a frost in California and the state's orange crop freezes, are OJ prices likely to go up or down? When I first heard this question, I thought "up, of course, since the supply of oranges decreases." But in fact the opposite is true, since those oranges are probably still fine for juicing even if they're no longer pretty enough to be sold as whole fruit. This is analogous to what's happening today with companies facing growth and exit challenges. The finance markets are still tight, and many private equity firms are having trouble raising new funds. Worse, the money they have in existing funds is often required to go to existing client companies. This makes raising new money expensive -- if you can get it at all. To make matters worse, the IPO market is only just beginning to recover after nearly two years of neglect by investors. For many cash-strapped and growth-constrained companies, the best options left are mergers and acquisitions.

While big companies still prefer to do big deals, Kevin indicates that the market for smaller deals is also thriving. This is probably due in part to acquirers being more conservative with their resources and more averse to risk. Simply put, when cash is king it's easier to get board approval for smaller, tuck-in acquisitions than for game-changing mega-mergers.

So, what's your company worth?

I know that dealmakers are often hesitant to give shoot-from-the-hip estimates about hypothetical companies and deals, so I'm grateful that Kevin was willing to give me some perspective on the going rate for "typical" companies these days. So if you're planning your exit or penning your business plan, what can you expect to come out with? Well, if you make it to profitability, somewhere between 5 and 8 times annual earnings before interest, taxes, depreciation and amortization (EBITDA) is the norm. You'll find yourself on the lower end of that scale if you're stuck in high single or low double-digit growth. Although most of our discussion focused on DOOH network owners, Kevin also shared a few very rough estimates for the folks who provide the software that powers these networks. In particular, licensed software guys can expect somewhere around 2x annual revenues. SaaS guys do a bit better, provided they aren't hemorrhaging customers. For SaaS providers, a rough estimate might be around 3-5x annual revenues, with the upper end of that scale reserved for companies with a 30% or higher growth rate.

If you're growing but not profitable... well, you're in for a tougher sell. Kevin suggests that potential acquirers will look at not only your assets, but the amount of money you've already raised, the milestones you've reached on that cash, and any peculiar provisions that past investors may have inserted into their contracts.

A word about scale

One more thing: remember the digital signage M&A article I wrote a few weeks ago, where I noted that some companies were employing the "roll-up" strategy to bundle together lots of smaller networks? Apparently that's a good thing. As mentioned above, bigger companies still prefer bigger deals. But more importantly, Kevin suggests that in our industry -- and particularly on the network side -- there is real value in scale. I can only imagine that this value will be multiplied if and when somebody can finally present a rigorous analysis of just how profitable digital signage networks can be, and how powerful advertising at the point-of-decision really is. While our industry has made a lot of progress in a variety of areas, our medium still isn't in the mainstream. That means it's more risky. And even if that higher risk is commensurate with a greater potential reward, when it comes to selling your company, a bigger risk almost always means a lower valuation.

Don't believe me? Ask Kevin Covert yourself

As I said, I reached out to Kevin because I noticed he'll be speaking at the Digital Signage Investor Conference this October in NYC. If you're shopping for a digital signage company, or if you are a digital signage company trying to raise money or get acquired, this conference is a great place to meet people who can actually make deals happen. Wall Street analysts, private equity guys and M&A guys like Kevin will be speaking on a broad range of topics and will be available for questions afterward. So instead of stalking them via phone and email, you can simply corner them in the room!

Nonsense FTC disclaimer: edicts from an obscure branch of the federal government apparently trump the free speech clause in the Bill of Rights, so I'm required to say that I don't work for Strategy Institute and they're not paying me for this post, but I will be attending the Digital Signage Investor Conference at the Strategy Institute's invitation.